The Impact of Tax Exclusive and Inclusive Prices on Demand

44 Pages Posted: 22 Dec 2012

See all articles by Naomi E. Feldman

Naomi E. Feldman

Hebrew University of Jerusalem, Department of Economics

Bradley J. Ruffle

McMaster University

Date Written: August 10, 2012

Abstract

We test the equivalence of tax-inclusive and tax-exclusive prices through a series of experiments that differ only in their handling of the tax. Subjects receive a cash budget and decide how much to keep and how much to spend on various attractively priced goods. Subjects spend significantly more when faced with tax-exclusive prices. This treatment effect is robust to different price levels, to initial shopping-cart purchases and persists throughout most of the ten rounds. A goods-level analysis, intra-round revisions as well as results from a third tax-deduction treatment all cast doubt on salience as the source of our findings.

Keywords: Experimental economics, sales tax, VAT, tax salience

JEL Classification: C91, H20, H31

Suggested Citation

Feldman, Naomi E. and Ruffle, Bradley J., The Impact of Tax Exclusive and Inclusive Prices on Demand (August 10, 2012). FEDS Working Paper No. 2012-50, Available at SSRN: https://ssrn.com/abstract=2192631 or http://dx.doi.org/10.2139/ssrn.2192631

Naomi E. Feldman (Contact Author)

Hebrew University of Jerusalem, Department of Economics ( email )

Mount Scopus
Jerusalem, Jerusalem 91905
Israel
9190501 (Fax)

Bradley J. Ruffle

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

HOME PAGE: http://https://socialsciences.mcmaster.ca/people/ruffle-bradley

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